Recession: When GDP is like ‘BRB’
It seems like the news is often talking about an economic recession these days. Maybe you’re wondering when it’s coming. Maybe you’re wondering, what even is a recession? We’ve got the details.
Getting to know gross domestic product
To understand what a recession is, you first have to know a little bit about an economic number called gross domestic product, or GDP.
Every day, all across the country, people head to work. Everyone from farmers and factory workers to babysitters and social media influencers. Together, they produce all the goods and services that make up what we think of as the United States economy.
If you add up the dollar value of all those things they make and services they deliver, you get the GDP of the U.S. economy. When the economy is growing, that GDP number gets bigger as workers make more stuff and perform more services.
But occasionally, that GDP number gets smaller. And that’s a recession.
Recession comes after a peak
“A recession is part of the cycle that economies go through,” says Bob Baur, Ph.D., chief global economist for Principal Global Investors. “A really simple way to think of that cycle is like seasons for an economy, except instead of repeating spring, summer, autumn, and winter annually, economic cycles may last for years.”
When businesses are doing well and the economy is growing, it’s sort of like spring. Lots of new companies pop up and consumers buy tons of things. Then the economy gets a bit too hot—it grows at an unsustainable rate and GDP hits a summer-like peak.
A recession is part of the cycle that economies go through.”
Bob Baur, Ph.D., chief global economist
After the peak, the economy starts to cool again and growth falls back for a while—that’s a recession. Businesses and consumers turn a bit more cautious. Some weaker businesses might even close down. Eventually, after the worst is over, the economy starts heating back up, growth returns, and the cycle starts over.
How do you know when you’re in a recession?
Typically, economists will say a recession is happening when GDP has gone down for 2 consecutive quarters. “There’s a committee at the National Bureau of Economic Research (NBER) that’s responsible for officially declaring when recessions start and end,” Baur says.
The NBER looks at several pieces of data like total employment numbers, inflation-adjusted household income, wholesale and retail sales figures, and industrial production. When the NBER committee sees a sizable decline in all 4 pieces of data for several months or quarters, they’ll call it a recession.
Recessions come in different shapes and sizes. According to the NBER, there have been 11 business cycles in the U.S. since the end of World War II, and the average recession lasted for 11 months. The 2008 recession was particularly bad and lasted for about 18 months. But it came after the U.S. economy had been growing for about 6 years. The recession before that, in 2001, only lasted about 8 months, and it came after about 10 years of growth.
What about the next recession?
Investors and the media have been focused on the possibility of a recession for several months. Everything from trade tensions between the U.S. and China to whether interest rates are going up or down seems to be sparking investor fears that economic growth will take a hit.
“The U.S. economy has been slowing,” Baur says, “but there are still some positive signs that economic growth can continue for a bit longer.” Housing activity is holding up. Home sales, new home starts, and homebuilder confidence are all up. “That doesn’t happen if a recession’s lurking,” he says.
The U.S. job market is another bright spot. “There are no signs of big layoffs,” Baur says. “Consumers will still see a welcoming job market with many employment opportunities.”
The revival we’ve seen in late 2019 could run out of steam ... that might set the stage for a mild recession.”
Baur sees the U.S. economy growing between 2% and 2.5% through most of 2020. “The revival we’ve seen in late 2019 could run out of steam in late 2020 or early 2021. That might set the stage for a mild recession.”
What to do next?
- Got a financial professional? They can help you figure out how a recession could affect your retirement savings. If you’d like to meet face to face, find one near you.
- Have a retirement account from your employer with service through Principal®? Log in to principal.com to review your investment mix. First time logging in? Get started.
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